UK Households Advised to Gift Money to Children Before HMRC Pension Tax Changes

As the UK government prepares to include pensions in the inheritance tax (IHT) net starting in 2027, families are seeking effective ways to protect their assets. One strategy gaining attention is gifting money to children or other beneficiaries ahead of these changes, taking advantage of tax-free allowances.

Currently, individuals can pass on unlimited amounts tax-free through gifts made from their income, without incurring the usual 40% inheritance tax applied to estates exceeding the threshold. However, there are three key rules that must be followed to qualify for this surplus income exemption:

Gifts must come from surplus income, not from savings or assets.
They need to be made regularly and reflect a pattern of normal expenditure.
The payments must not diminish the donor’s standard of living.

Research by Hargreaves Lansdown reveals that around 23% of people plan to give away money to reduce their potential inheritance tax liability. Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown, emphasizes the importance of this approach, noting, “Pensions can be one of our biggest assets, and more people will face inheritance tax on these in the years ahead.”

Ms. Morrissey also cautions donors to be mindful of their own financial security: “None of us know how long we will live or what the future holds. It’s vital not to overspend or give away too much, since doing so could leave you struggling in later years.”

In addition to gifts from income, certain gifts remain exempt from inheritance tax altogether. Gifts between spouses or civil partners who live permanently in the UK are exempt, allowing unlimited transfers during their lifetime. Furthermore, donations to charities or political parties also attract no inheritance tax.

By planning ahead and understanding the rules around gifting, UK households can help minimize their inheritance tax burden and protect their wealth for future generations.